Role of Private Sector in the growth of Power

Infrastructure in South Asia

Mukunda Paudyal, Joint Secretary,

Investment Board, Government of Nepal

Outline of Presentation

1. The case for Private Investment in Energy Infrastructure

2. Private Sector investment in power in Nepal 1. Trend 2. Challenges 3. Key enabling factors

1. Energy cooperation in South Asia 2. Interventions needed

3. Cross Border Trade – Investment Board Nepal context

Energy Sector in South Asia

3

Traditional Fuel Use Energy Access

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Source: ADB 2012

Increasing Energy Deficit in Nepal

• Only ~2% of total energy in Nepal is met by commercial electricity

• Energy deficit in Nepal in 2011-12 was 19.6%, mostly in the dry season, but peak deficit was much higher

• The cost to society of unmet demand for commercial electricity is well documented

• As a state we have an obligation to fulfill that demand

The case for Private Investment in

Energy Infrastructure • The state has competing demands on limited

resources

• For example if Nepal is to meet its unmet electrical energy demand of 2011-12, it would need:

▫ 450 MW

▫ USD 900 mil (not including the delivery costs)

• To put that in context, this is around 20% of Nepal’s budgetary expense

Private investment will be critical in meeting future demand and the State must play a facilitating role

Increasing trend of Private Investment

in Nepal’s energy Sector 2012 2023

NEA and NEA Sub-Projects MWh 4,473,732 10,316,789

IPP projects MWh 1,619,978 13,263,978

Total MWh 6,093,710 23,580,767

IPP Contribution to total Energy Generation

% 27% 56%

Hydropower Projects in the active

development Project Capacity Developer Status

Arun III 900 MW SJVNL PDA Negotiations underway

Upper Karnali 900 MW GMR PDA Negotiations underway

Tamakoshi -3 650 MW SN Power PDA Negotiations underway

West Seti 750 MW CWEI, GON Development

Upper Marsyangdi 600 MW GMR PDA Negotiations underway

Upper Tamakoshi 456 MW NEA - Subsidiary Construction in-progress

Upper Seti 140 MW NEA - Subsidiary Development

Likhu – IV 120 MW Bhilwara Ready for construction

Tamor 450 MW Sanima Hydro DPR finalization

Upper Trishuli 216 MW NWEDP DPR finalization

Kirne 67 MW SN Power Waiting for PDA, PPA

Budhi Gandaki 600 MW NEA DPR

Chameliya 30 MW NEA In construction

Rahughat 35 MW NEA In Construction

Kulekhani-III 14 MW NEA In construction

Chilime Projects 270 MW NEA, Public Various stages

Total 6,200 MW

Challenges

Political consensus in Nepal on how its hydropower resources are to be developed

Geopolitics of the Region

Acceptance of electricity as a tradable commodity

Transmission

Financial health of Electricity Board and Discoms

Power Trade Agreement

Addressing the Challenges

Establishment of a high level, empowered Investment Board as one window facilitator for large scale projects

Political engagement at all levels underway

GON is committed to the Harmonization of hydro power related laws

Project Development Agreement Negotiations underway to ensure bankability of projects

Nepal has been raising the need for a comprehensive Power Trade Agreement with India at all bilateral meetings

Regional Trade in Power is Key

• System Operational Benefits from ▫ Complementarity in energy demand and energy resource endowments ▫ Optimal utilization of resources from economies of scale ; Reduced spinning reserves ▫ Improved energy security and reliability in the system ▫ Reduced environmental impact and climate change imperative

• Economic and Financial Benefits from: ▫ Substantial benefit to smaller exporting economies ▫ Increased revenues from trade and industrial activities, enhanced industrial productivity ▫ Significant relief from energy constraints to rapid economic growth

• National Benefits ▫ Implications of trade to energy security ▫ Reduction of supply costs

SAPP (South African Power Pool)` could realize 45% savings in costs for meeting the same demand if the regional plan is adopted versus the sum of the national power development plans to meet the same demand

▫ Cash flow implications – the make or buy choice in an environment with competing demands on limited resources

Existing Level of Trade

• Bhutan exported of 5,586 GWh in FY 2011-12

• Afghanistan imported 78% of is energy from Central Asia

• Nepal’s import from India of 694 GWh (17.85% of its total supply) in 2011-12

• Pakistan’s import of about 25MW of power from Iran

Evolution of Trading Arrangements

Bilateral trading between

neighboring countries

Bhutan - India

Bilateral trade involving third transit country

Nepal-Bangladesh

Trade among synchronized

national power systems

Multilateral trade within a regional pool mechanism

Barriers to Regional Integration among

SAARC Member States 1. Political and Security barriers Political rhetoric for Regional Integration has not

translated into Political Will and action Managing individual countries’ energy security -

mindset that regards energy trade as reducing energy security

Public opposition based on nationalistic fervor

2. Infrastructure Constraints Lack of electrical interconnections and gas

pipelines across borders ( except Bhutan-India, Nepal-India, Afghanistan-Central Asia)

Barriers / Constraints to Regional

Integration among SAARC Member States 3. Legal and institutional barriers

Policy inconsistency among member states - changes in one country have implications in another

Absence of solvent utilities • Utilities as vehicles of social policy, high theft/non

payment and system losses Ownership structures and Contracting Practices

• Primarily state owned not conducive for export-import opportunities

• Lack of sustainable commercial and contractual arrangements – ad hoc political agreements such as in Bhutan are acceptable in the nascent stages of trade

• Slow rate of sector restructuring

Interventions Needed – only a few

• Further strengthen public support for treating energy imports as enhancing energy security

• Harmonize the Legal and Regulatory Frameworks • Promote alternative financing mechanisms for

developing regional energy trade and cooperation - initiatives that enable private sector participation ▫ Nam Theun 2 and Muzzafarpur-Dhalkebar are truly

innovative models to replicate

• Adopt energy policies in SMS need long term alignment and accelerate energy sector reforms

• Joint Government, Regulatory, TSO, Grid level understanding for promote Cross Border energy trade

Cross Border Trade – IBN Context

Cross Border Trade – IBN Context

• IBN is mandated with the implementation of 4 export (India) oriented projects with a total capacity of 3,050MW

• There are substantial regulatory, contractual and technical obstacles to viable cross border electricity trade between Nepal and India

• Failing to resolve these issues will make it difficult, if not impossible to finance hydropower projects exporting to India

• A Power Trade Agreement between Nepal and India is absolutely essential to ensure viability of these projects

Nepal - India PTA must resolve the following uncertainties

▫ Regulatory Uncertainty :

Past GoI policy of levying INR2 (~US$0.04) per kWh import duty makes Nepali exporters uncompetitive to Indian buyers – uncertainty remains

Although GoI appears to have agreed to exempt some projects currently under development in Nepal– but this remains an uncertainty in the minds of the investors

• Contractual Uncertainty

Unclear if HPPs in Nepal exporting to India will receive the same open access to the power trading market, transmission capacity or to the regulated tariff accorded to Indian HPPs

Single Buyer/Trader in India: current perception is that only state owned/backed electricity trading companies (PTC India and NTPC ) are allowed to buy or sell electricity from Nepal. Investors fear this may affect their competitiveness negatively.

▫ Transmission and Technical Barriers

Enabling environment for the construction of Crossborder Transmission Facilities

Coordination mechanisms providing for appropriate rights of way, design specifications and operational protocols

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Challenges in Nepal India – Cross

Border Trade

India must lead the way

• The sheer size of India’s power market relative to other SAARC countries

• India’s geographic location ▫ With the exception of

Pakistan-Afghanistan, no trade is possible between any two countries in the region without India’s involvement

• India’s dominant role in the geopolitics of the region

… and others in the region must do their part to effect necessary reforms and change public perceptions about trade domestically – trade = energy security

Role of Donor Agencies

• Donors play an important role in developing regional trade through providing financing, Technical Expertise and Neutral Advisors ▫ NBI – World Bank and African Development Bank ▫ NT2 – WB, ADB, ▫ SIEPAC – Inter-American Development Bank

• Play a key role in helping regions recognize, adopt and mitigate

environmental and social impacts

• Donors must avoid imposing ambitious regional trade agenda and allow members in the region to evolve at their own pace

• Donor financing – concessional loans and grants, can distort the market allowing tariffs to be set a sub-economic levels and crowding out the private sector, eventually making the necessary adjustments painful and unpopular

Financing Options – Investment

Context and Risk Ratings • Cross border projects are considerably more

complex and carries more risk for project sponsors • From a financing perspective, energy trade project

risk can be classified into two broad categories: ▫ Political Risk – legal, regulatory ▫ Project Risk - technical, commercial, financial

• Private participation will be challenging, but not impossible, particularly for high risk countries

• Initial projects involving high risk countries will most likely be funded by Government, donors, multilaterals, on grant or concessional loans

Potential Funders and their products

• Technical assistance for the highest risk projects • Grants and soft loans for medium risk projects Donors

• Public and private sector windows • Technical assistance • Private sector funding via Foreign Currency Loans, Equity Funding

IFIs

• Lack of credit ratings and relatively weak balance sheet limits funding options • Will have to depend on state funding or indirectly by donor and

bilateral/multilaterals

National Utilities

• Developer Risk Equity • Contractors risk capital in the form of equity and supplier credit through ECAs • VC, Private Equity, Market Lenders

Private Sector

Providers of Risk Mitigation Products

• Payout when a given event triggers a loss – PRI and PRGs • PRGs provided by World Bank and ADBs of the world, but their

exposure is normally counter guaranteed by host government of the country of investment

• PRI, provide by MIGA, protects against adverse regulatory actions, but proving the occurrence of triggering event can be challenging

Event Specific

• Credit enhancements such as partial credit guarantees • Normally covers the back end years of loans • Objective is normally to increase tenors

General default

Guarantees